Forrester Research, Inc. — Q2 2011 Form 10-Q
Business context and period: Unaudited results for the quarter and six months ended June 30, 2011, compared with the same 2010 periods. Forrester earns revenue from research memberships, advisory and consulting services, and events. Amounts below are in millions except per-share data.
Financial performance
- Q2 revenue: $73.5, up 14% year over year. Research revenue was $47.3, up 16%; advisory and other revenue was $26.1, up 9%.
- Q2 profitability: Operating income was $9.6, down 5% (operating margin 13.1%, versus 15.7%). Net income was $5.5, down 21% (net margin 7.4%, versus 10.7%). Diluted EPS was $0.24, versus $0.30.
- First-half revenue and earnings: Revenue was $139.2, up 12%; operating income was $13.8, down 23%; net income was $8.4, down 34%. Operating margin was 9.9%, versus 14.4%, and net margin was 6.0%, versus 10.2%. Diluted EPS was $0.36, versus $0.55.
- Costs and margins: Q2 selling and marketing expense rose 26% to $26.0, or 36% of revenue versus 32%. Cost of services rose 15% to $28.0 and remained 38% of revenue. First-half selling and marketing expense increased 26% to $51.5, reaching 37% of revenue versus 33%.
- Cash flow: First-half operating cash flow was $38.1, up from $32.4. Investing activities used $38.4, including $26.1 of property and equipment purchases and $7.0 for acquisitions. Financing activities used $6.6, including $13.4 of share repurchases.
- Liquidity and capital: At June 30, cash and equivalents were $83.2; marketable securities were $144.4, including $9.3 of long-term auction-rate securities (ARS). Current assets were $300.8 and current liabilities $164.4. The filing reports no debt or credit line; it says no line of credit is anticipated to be needed. Cash, investments, and operating cash flow are expected to cover requirements for at least two years.
Material changes and management commentary
- Revenue growth reflected client enrichment, more clients, and foreign-exchange effects. Client count rose 5% to 2,647; deferred revenue increased 20% to $130.4; agreement value rose 10% to $207.6. Client retention was 81%, dollar retention 91%, and enrichment 103%.
- Management attributed lower operating profitability mainly to greater spending on sales and marketing, research and fulfillment staffing, facilities, and travel. Selling and marketing headcount rose to 491 from 407 a year earlier; research and fulfillment headcount increased to 541 from 441.
- Q2 included $1.5 of lease costs related to the new Cambridge headquarters. The company expects the facility to become operational in Q3 2011. A $0.8 stock-compensation credit in Q2 followed a revised estimate that performance-based awards would vest at 40%, rather than 100%.
- Forrester acquired Springboard Research on May 12 for approximately $9.0, including $6.7 paid at closing and $2.3 subject to holdback terms. Its reported-period contribution was not material. The acquisition added $4.8 of identifiable intangible assets and $3.7 of goodwill.
- Effective January 1, 2011, the company adopted updated multiple-deliverable revenue guidance; management said adoption had no material financial impact.
Outlook, risks, and contingencies
- Management anticipated 2011 property and equipment spending of $35–$40, mostly for the new headquarters. It expected depreciation to increase significantly in the second half due to the headquarters build-out and customer-facing technology projects.
- The company’s ongoing plan, subject to business conditions, was to expand the sales force by 15%–20% annually and continue share repurchases as market conditions warrant. $84.0 remained under the repurchase authorization at June 30.
- ARS auctions had continued to fail since 2008; the securities may not be readily liquidated. Their $9.3 carrying value was based on Level 3 discounted-cash-flow assumptions, which are volatile. Further market deterioration could cause additional other-comprehensive-loss or impairment charges. Management did not expect the lack of ARS liquidity to disrupt its business plan.
- Management cited risks including membership retention and enrichment, technology spending, economic and market conditions, international operations, competition, and attracting and retaining staff. Results may vary by quarter; management cautioned that interim results may not indicate full-year performance.
- The filing reported effective disclosure controls as of June 30 and no material change in internal control over financial reporting during the quarter. No material changes to contractual obligations or market-risk assessment were reported; no off-balance-sheet financing arrangements were maintained.
Important facts for investors to verify
- Whether revenue growth and improving retention metrics continue to offset expense growth, particularly sales-force and headquarters costs.
- Actual 2011 capital spending, headquarters completion, and the expected effect of higher depreciation and technology investment.
- Liquidity, valuation assumptions, and potential impairment exposure associated with the illiquid ARS portfolio.
- Springboard integration, employee and facility holdback conditions, and the realization of expected acquisition benefits.
- Share repurchase pace and remaining authorization, alongside the company’s cash needs and operating cash generation.